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Msg  72409 of 73594  at  10/25/2022 11:14:36 AM  by


The following message was updated on 10/25/2022 11:14:36 AM.

The Launch Pad

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The Launch Pad
October 25, 2022
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Futures fell this morning as investors look ahead to big technology earnings for further clues into the health of the U.S. economy. Today’s moves come after stocks rose for a second straight session yesterday as investors considered whether the Fed will slow its pace of interest-rate hikes after assessing more weak economic data. Data indicated that Fed tightening is starting to hit the economy, with S&P Global PMI indicators showing contraction in the services and manufacturing sectors. Still, earnings remain the focus for now, with investors on edge over whether companies can deliver positive results among mounting headwinds.

Chinese stocks listed in the U.S. tumbled as Xi Jinping’s historic third term as President (two terms has been the convention) marked what some believed would be continued pressure on private businesses. In his speech, Xi spoke of regulating the “wealth accumulation mechanism”, which was interpreted as spreading wealth to the masses via government enterprises (vs. private). The Nasdaq Golden Dragon China Index declined as much as 21% before recovering to end the day down -14.4%. With over 50% of the index constituents in the internet industry group, names such as Baidu, Alibaba, and Pinduoduo each declined double digits, with Pinduoduo faring the worst down nearly -25%.

Rishi Sunak is in. The financial markets seem to be ok with the new appointment – for now. Following the news that Mr. Sunak would succeed Ms. Truss as U.K.’s prime minister, the pound rallied slightly, and government bonds rallied significantly. 20-year gilts stood at 3.9% this morning after topping 5% following Truss’ tax cuts pledge. A brimming agenda will meet Mr. Sunak in his first days as prime minister. As a former treasury official, hopes are high that Sunak will be able to steer the country down the right fiscal path. With high inflation stoked by rising energy costs, and a conservative party in dire need of some TLC, Mr. Sunak will undoubtedly face chilly headwinds during his first winter as prime minister.

Junk bond sales globally have fallen 73% YoY, highlighting how investors have been avoiding the high-yield space (even as yields soar), fearing that borrowers could be vulnerable to inflation and an economic downturn. This is a drastic change from last year when the market had multiple deals per day. Now, weeks can go by without a single high-yield bond being offered and that is likely to continue as central banks remain intent on sticking with their aggressive interest rate paths. The decline shows just how quickly the space has taken a turn, as policy makers stick to their hawkish interest-rate strategy.

Pricing probe. Following concerns over rising food prices, Canada’s Competition Bureau is launching “a study of grocery store competition”. Grocery stores were quick to point fingers at inflation and geopolitics to justify high prices, but now the antitrust watchdog said it wants to better understand if lack of competition is also at play. With the industry dominated by so few companies, Canadians have been left with few choices leaving shoppers at the mercy of the retailers. Last month, prices for food purchased from stores were up 11% from a year ago, the fastest annual gain since 1981.

Halloween candy prices are scary this year. Rising costs have sent the price of sugar up 17%. Hershey and Nestle have responded by increasing their prices by 14% and 6.5% respectively. Fortunately for the sector, Halloween spending is back. It is estimated that 180 million Americans participate in Halloween purchasing nearly 600 million pounds and consuming on average 3.4 pounds over the holiday. The confectionary category hit $36.9 billion in 2021 and is projected to reach $44.9 billion by 2026. While candy is getting more expensive, shrinkflation is happening as well, helping with portion control on those who least expect it. Have you seen the size of Kit Kats lately?

Diversion: I would be pretty shocked too.

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Company news

United Parcel Service beat consensus earnings and remained on track to achieve its full-year financial targets, giving investors greater confidence it’s managing through a slump in peak-season demand that has rattled the shipping market. Revenue in the U.S. segment, the company’s largest, grew in large part because of higher shipping rates, which also boosted UPS’ international business. Revenue in the company’s supply chain solutions business fell, though, due to a decline in air and ocean freight forwarding.

General Electric cut its full-year profit target despite strong cash performance in the past quarter, as higher costs in the struggling wind operations add to ongoing challenges with supply chain and labour. The adjustment in guidance underscores the depth of challenges facing the renewable energy business as CEO Larry Culp pushes to turn around the once-mighty manufacturer. Stabilizing this business will be critical for the planned combination and spin-off of GE’s wind turbine, power-equipment and grid businesses in 2024.

General Motors beat earnings estimates on record revenue and affirmed its guidance for the year, showing that rising interest rates have yet to hit sales. GM posted revenue of $41.9 billion thanks to a 24% jump in U.S. vehicles sales for the three months ending Sept. 30, compared to analysts’ expectations of $42 billion in revenue for the quarter. Improved availability of semiconductors and other components helped boost sales of its highest margin vehicles in the US, especially large pickups and SUVs. GM also saw higher profits in China.

Canopy Growth announced a strategy to accelerate its entry into the U.S. cannabis industry and unleash the value of its full U.S. cannabis ecosystem. They will accomplish this by creating a new entity, Canopy USA LLC, to purchase the companies -- Acreage Holdings Inc., Jetty Extracts and Wana Brands -- in which it has options to take control in the event of US legalization. The deal, which is subject to a shareholder vote, will make Canopy profitable and allow it to create a US “house of brands” that can move into new states and use each company’s intellectual property, even without the federal legal change that the deals were contingent on, he said.


European steelmakers will probably need to cut output as the threat of a recession slows demand and pushes prices down, according Swedish producer SSAB AB. The region’s energy crisis is hurting steel companies by crippling consumption from crucial customers like manufacturers and builders, while also raising plant costs. Jefferies Group LLC estimates that about a fifth of European steel capacity is already curtailed, with giant ArcelorMittal SA bearing the brunt of the cuts. This marks a sharp end to a boom-era for steel sector, when prices surged to a record in the aftermath of the Covid pandemic.

Data is showing that China imported record quantities of Russian LNG and steelmaking coal in September, as total purchases of energy products topped $50 billion since the invasion of Ukraine pushed Moscow to expand sales to strategic allies. Coking coal imports from Russia jumped to 2.5 million tons in September, from about 900,000 tons in the same month last year and 1.9 million tons in August. LNG sales rose by a third from a year ago to 819,000 tons, despite a 12% decline in China’s overall purchases. China hasn’t reported imports via pipelines, the main conduit for Russian gas, since the start of the year. Total purchases of Russian energy, including oil products, slowed to $7.5 billion last month from a revised record of $8.4 billion in August, although the figure is well-ahead of last year’s $4.7 billion.

Fixed income and economics

With risk markets having one of their most difficult years in a long time, it’s no surprise that corporate primary market activity has struggled as well. Last week we saw just two lonely deals hit domestic markets that no less came from banks ahead of their earnings blackout. TD Bank raised $2 billion in a five-year subordinated bonds that printed at an ugly +185.0 bps over the benchmark curve to tie the worst ever issue spread amongst all bail-in paper ever in their short history. The deal brought in 68 buyers with the order book just 1.5X covered and a +5.0 bps concession. BMO followed them later in the week (and after the hotter than expected CPI report) and printed a $750 million NVCC debt (their first in a year). The ten-year offering was better received than with 69 buyers with final books approximately 3X covered. That brought total domestic corporate deal flow in October to just $6 billion and barely half of the $11.7 billion watershed mark posted in October 2021. Year-to-date supply now stands at $96.5 billion and 13.1% behind last year’s pace. A similar story is evolving in the U.S. as well, specifically in high yield corporates which have seen sales plummet by 73% through yesterday. The decline highlights how money managers have been avoiding the junk bond space even as yields soar, fearing that borrowers could be vulnerable to inflation and the looming economic downturn. Worries about potential default risk have left junk-rated borrowers to access capital via private markets.

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